Planning for taxes at retirement

During our working and wealth-building years, most investors are focused on minimizing the taxes they pay on their hard-earned assets. But how much do we consider the impact that taxes may have on our savings once we enter retirement?
You may fall into a lower tax bracket once you stop working full-time, but you could still receive a significant amount of taxable income from portfolio withdrawals, pension payments, Social Security benefits, or part-time wages.
If you’re not careful, taxes could wind up taking a big bite out of your nest egg — just at the time you need it the most.
While paying taxes is a certainty, what will happen with our current tax laws is anyone’s guess. With concerns mounting over our nation’s federal deficits and debt, an overhaul of our tax system could mean higher tax rates in the future.
The uncertainty about what changes may be coming raises some important questions. When should you pay taxes on the money you’re tucking away in your nest egg — now or when you reach retirement? What will your tax rate be when it comes time to start tapping into your retirement savings?
One way to address these unknowns is to diversify your investments, with a focus on how specific types of accounts in your portfolio are taxed.
“A tax diversification strategy can give investors more options to help manage their tax liability and stretch precious resources through their retirement years,” said Joseph J. Earyes, CPA, FNCB first senior vice president.
* Tax Treatment of Investment / Retirement Accounts

Taxable Brokerage Accounts

Since any monies invested in the markets have already been taxed as income, investors pay capital gains taxes only on any appreciation. If you hold the investment for longer than a year, when you liquidate assets you’ll be taxed at long-term capital gain rates, which have historically been significantly lower than ordinary income tax rates.

Tax-deferred Accounts

Contributing to a traditional retirement account, like an IRA or 401(k), can help investors reduce taxable income during their working years. Contributions made with pre-tax dollars have the potential to grow tax-deferred until retirement (or beginning at age 59 ½). Funds withdrawn are taxed as ordinary income, reducing your available spending dollars. At age 70 ½, you must begin making a required minimum withdrawal (RMD) annually or pay a sizable penalty.

Tax-Free Accounts

While contributions do not reduce taxable income, the Roth IRA offers tax-free withdrawal of funds starting at age 59 ½ or when you retire, as long as certain requirements are met. The Roth has no required minimum withdrawals over the lifetime of the original account owner.
* Benefits of Tax Diversification
“Investors who have all three types of accounts — a taxable brokerage account, a tax-deferred retirement account and a tax-free Roth IRA — may have more control over the taxes they pay as a retiree,” added Chris DiMattio, senior vice president at FNCB Wealth Management Services and a registered representative of INVEST.
In their early retirement years, investors may wish to take income from taxable accounts, paying taxes only on capital gains — leaving tax-advantaged accounts untouched with the potential for continued tax-deferred growth.
When investors reach age 70 ½ and must begin taking RMD from tax-deferred retirement accounts, any withdrawals are taxed as ordinary income. Collecting Social Security benefits can also increase tax liability since the government considers up to 85 percent of your Social Security benefits to be taxable.
Tapping funds in your tax-free Roth IRA last can have some advantages. Should you have a serious health issue later in life, you can draw money from a Roth to pay medical bills with no tax worries.
While balancing withdrawals from all three accounts after retirement may potentially keep you at a lower marginal tax rate and help manage income to reduce taxes on Social Security benefits, every case is different and should be looked at closely before any decisions are made..
According to DiMattio, “It’s best to ask your tax professional and financial advisor if tax diversification may be beneficial in your personal situation.”
INVEST Financial Corporation, member FINRA/SIPC offers securities, advisory services and insurance products and is not affiliated with FNCB. INVEST does not offer tax advice.

PPL Electric Utilities wants to increase distribution rates and the flat customer charge while petitioning regulators to allow it to grow its guaranteed profits from operations. The increase could cost electricity users as much as $10 per month, according